The Loophole That Could Blunt a Debt Limit Debacle

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Current funding for the federal government expires at midnight on Monday. If Congress fails to act, an 1884 law, the Anti-deficiency Act, requires the government to shut down except for essential operations.

The federal government must also deal with the rapid approach of the debt limit, which expires on October 17, according to the latest Treasury Department estimate. The date isn’t certain because the debt limit is a dollar figure and when it is hit depends on the Treasury’s variable cash flow.

Once the debt limit is hit, Treasury will only have cash to pay bills as tax receipts are received from regular withholding on wages. But corporate and other major tax sources only send in their payments on a quarterly basis, most recently on September 15.

October 1: $42 billion in payments to Medicare Advantage and Medicare Part D plans; pay for active duty military members plus retirement benefits for veterans and civil service employees.

October 3: $25 billion in Social Security benefits.

October 9, 16 and 23: $12 billion each day for additional Social Security benefits.

October 31: $6 billion of interest on the federal debt.

November 1: $67 billion in combined Social Security and other payments in first bullet.

November 13: $12 billion in additional Social Security benefits.

November 15: $30 billion payment of interest on Treasury securities.

Notice that this list does not include ordinary payments to vendors providing goods and services to the federal government, whose bills are typically paid when invoices are received and verified by the contracting departments and agencies.

It is not clear what the Treasury will do when it has insufficient cash to make all the payments that are due on a particular day. It may just hold payments until there is sufficient cash and continue to pay them in the order received. The Prompt Payment Act requires payments to be made within 30 days after a valid invoice is submitted. However, this is not a “hard” legal requirement; vendors simply get interest on overdue payments after that date.

The Office of Management and Budget has the authority to reapportion appropriated funds and allocate how much departments and agencies have to spend in a given fiscal year within a given time period, but not past a fiscal year. The Impoundment Act of 1974 requires that all funds appropriated for a given fiscal year must be spent within that year unless the president requests and Congress agrees to a rescission to cancel a payment or a deferral to push it into a future fiscal year.

A potential problem with using reapportionment authority is that Congress is very unlikely to enact full-year appropriations before the beginning of fiscal year 2014, which begins on October 1. Instead, it will enact a continuing resolution, which permits departments and agencies to continue spending at the same level as in FY 2013. That resolution will only run until November 15, leaving OMB with very little flexibility to move funds around.

A 1985 Government Accountability Office opinion says the government can prioritize payments. The Treasury Department, however, has repeatedly said that it lacks the authority to do so and must pay bills when due. Failure to do so would constitute a default, in its view, regardless of whether the missed payment is for a government vendor or a bond holder.

This view is generally not shared by experts, who define “default” more narrowly as a failure to pay interest or principal on the debt exactly when due.

The question is ambiguous because the law is silent on the question of prioritizing payments. The GAO interpreted this silence as permission—the government can do what is not explicitly prohibited. Treasury views the silence as a prohibition—it can only do what the law explicitly permits it to do. It’s not obvious which view is correct because it’s never been litigated.

The Republican-controlled House of Representatives appears to agree with the Treasury on this. In order to give Treasury explicit authority to give first priority to debt payments, the House passed the “Full Faith and Credit Act” on May 9.

Quite apart from the legal question of whether Treasury could prioritize payments in the event that the debt limit becomes binding, there is a question of practicality. The Treasury’s Financial Management Service processes thousands of payments per day on instructions conveyed electronically by departments and agencies, which have the responsibility for determining the validity and time sensitivity of a payment.

FMS is in the position of a bank that has received a check for clearance. It cannot tell what the payment is for; all it can do is check to see if the account it is drawn on is legitimate and there are funds available.

However, Treasury does know what payments are for interest on the debt, because those are paid separately by the Bureau of the Public Debt.

In practice, any decision to prioritize payments would have to be made by the departments and agencies themselves in conjunction with OMB.

As this is written, it appears that Republicans have decided to relent on their insistence that the Affordable Care Act be defunded as their price for keeping the government open next week. Instead, they plan to add a “Christmas tree” list of every legislative wish they have to the debt limit. These items include energy provisions, regulatory reform, tax reform and many others totally unrelated to the debt.

Washington insiders think House Republicans simply want the opportunity to cast a symbolic vote for these measures, as they have voted 42 times to repeal ACA, before they are all stripped out in the Senate and a clean debt limit increase is enacted. But this is not a foregone conclusion; House Republicans may insist on something in return for raising the debt limit, despite President Obama’s promise that he will not bargain on this issue.

There is also the problem of the ticking clock. Although in principle a debt limit increase could be enacted quickly, should Republican extremists demand their pound of flesh and filibuster the debt limit, action may be delayed past the “drop dead” date. At that point the government will be in uncharted territory.